[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.

[00:00:16] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. And Happy Friday, everybody. If you are new here if you’re just joining us for the first time, on Fridays here at Fiscally Savage, we try to take something in the news and go a few steps deeper. And today, we are gonna have ourselves a good time because I think one of the things that defines the news cycles these days is just how short they are. So like for example, I was driving to go get my kids this morning and I noticed that gas prices have tipped up. But what I have not seen is the news media like crying Armageddon and politicians grabbing every microphone available to tell us all about how terrible this is. And it’s almost like they only care during election years or something like that and that really is indicative of just kind of how the news cycle goes. So whatever’s cool and sexy, that’s what they pick up. And so what’s in the news right now? That’s right, ladies and gentlemen: banking.

[00:01:12] Now, one of the things I’ve said on this show frequently is that cryptocurrency is putting itself out there as a trustless system that could replace the banking system. And there’s great appetite for this. I’ve done an entire four-part series on cryptocurrency, starting with the creation and release of Bitcoin, which was a clear reference to the Great Recession, which was released in 2009, which contained a very pointed reference to the banks getting bailed out. That was whoever Satoshi Nakamoto was or is, they clearly did not like the idea of how the banking system was really wagging the dog at this point. The problem though is that the crypto industry, as it’s continued to grow, has been stumbling backwards one scandal at a time into understanding why certain regulations exist while at the same time swearing up and down that they just need to have no regulations. And with the collapse of Silicon Valley Bank and Silvergate Bank and all of the other exchanges that are going down and the multibillion-dollar bankruptcies at Terra Luna and Celsius, I think it’s pretty clear that they maybe could learn a thing or two about how the banking system works and what some of the pitfalls were. Because it turns out that even in a trustless system like crypto, even if it worked exactly as they advertise which it isn’t yet, there are still things that people are going to do. There are still ways that people are going to manipulate this. And how do we know this? Because we’ve been doing this forever. And so today, ladies and gentlemen, what I’m gonna be doing is I’m gonna take you on a trip down memory lane to the bad old days of all the different panics and crises across the United States history, and we’re gonna hope to learn a thing or two about how banking works and maybe how it could be better along the way.

[00:03:09] Now, whenever you talk about banking, it’s a very tricky subject because there’s a lot of different things that go into it — trust being the most critical of them all. But also, this is a great example when it comes to running a bank or running a financial institution or system in any way, shape, or form, it is very clear to see that the what appears to be the obvious solution, if you stop and think about it, is not very obvious. And this brings us to what a lot of people when they first start learning about this, they learn of this thing called fractional reserve banking, and they lose their collective minds. So let me explain to you what that is because anybody who’s looking into the banking system, they’re gonna run across this, and it’s pretty much the first time in which they have to make a choice. Do I remain curious and I wanna learn more in why we do it this way? Or do I lose my mind and I start stacking gold go off into the woods with bullets, or become a crypto bro? So fractional reserve banking is basically what’s practiced by almost all banks in the world. What it means is that if you go into a bank and you give them a dollar as a deposit, they’re only gonna keep a fraction of that on hand at any given time. What are they doing with the rest of it? Well, they’re loaning it out. They’re using that money to make money. That’s what banks do. The other option for this is called full reserve, in which you give them a dollar and they keep a dollar. But you might have already realized what the major issue with a full reserve system would be. And that is: how does the bank keep its doors open and hire security and transfer funds around and how do people get loans if the bank is going to take a dollar and hold a dollar? And that of course is the tension between them because there are people who say that full reserve banking could occur, and the answer is on small scales totally. But they typically require a strong government subsidy in order to function as an actual bank. And you’ll also notice that this eliminates the ability for a bank to give a loan, which means now we need a completely different set of people who are gonna be giving loans, and you can kind of see how this could go poorly very, very quickly.

[00:05:25] So the issue between full reserve and fractional reserve is what fraction do you actually want the banks to be holding? And this brings us to banks and the idea of liquidity. Banks need to have liquidity — that is cash on hand — so that if you walk into the bank and say, Hey, I need a hundred bucks, they have a hundred bucks to give you. And so right now in the United States, if you give a bank a dollar, they’re gonna keep four cents of every dollar in deposit on hand at any given time. And you might think, well, that’s pretty low, and you would be right. Historically, it is pretty low. But there’s reasons and statistics and all sorts of charts in which they’ve arrived at this 4% number. But if we wanted banks to be more solid, we could tell the banks and say, Hey, what we really want you to do is actually hold more. So instead of four cents, you gotta hold 10 cents. And the banks will howl at this. Why? Because what are they doing with the other 90 cents? They’re making more money with it. So the more they have to have on hand, the less they can employ to actually go out and make money.

[00:06:26] Now that’s in brief and I’m gonna try to keep this under 30 minutes, so let’s just move on to what type of banks are there because all of this is gonna be really important here in a second. There are basically three types of banks: retail banks, commercial banks, and investment banks. Retail bank is personal banking. It’s what you where your checking and savings is. It’s where your direct deposits go. It’s where you write checks out of. It’s what your debit card comes out of it. It also is personal loans for like mortgages, autos, credit cards, all those types of things. So basically, you, my dear listener, as a person and individual, go to a retail bank. And of course because in this country we like to think of corporations as people, they then would have their own special banks called commercial banks, and you can just think about it basically as a retail bank but for businesses because they do all the same services. The third type of bank is called an investment bank. And investment banks, calling them a bank is generous, but basically what they do is they assist in large, complex financial transactions, so mergers and acquisitions, underwriting of stocks and bonds, initial public offerings in order to bring companies public, private equity, hedge fund activities, all of those things. The high finance ideas are handled by investment banks. And you can kind of see how this goes. A retail bank is pretty boring and, you know, the returns are not gonna be great. But then again, they shouldn’t be like that’s your bank and your money when sitting in the bank should be boring. But investment banks are where just oodles and oodles of cash could be made or lost. And so these three different types of banks exist to serve different types of customers in different functions within the economy. In the end, all three of these types of banks are critical infrastructure. Like an advanced economy will not function without these three types of banks. But they’re also banks that are controlling the pipes of a financial system where the money is flowing, which means they are the people that are closest to that money and the ability to leverage it into more money because they’re the ones who are making the loans, helping people make the bets, and all of the different things that we think of as banking gone wrong.

[00:08:36] And so with that understanding, let’s go back and just go back across history in the United States and start looking at all the different places in which banking has gone wrong and what different things contributed to those breaking down. So ladies and gentlemen, a history of financial panics. Now, from the period of 1776 to present, there was a total of 14 financial panics in the United States. Now, I’m using a very specific metric for this. There are people who would argue with me, but it’s worth noting that our very first action as a country was to have a financial panic in 1792 that lasted like three months and it wasn’t that bad. Not a lot of banks went under, and you know, as far as financial panics go, not a bad one. But it’s worth noting that excluding the financial panic of 1790, from 1776 to the Great Depression, there were a total of eight financial panics, and every single one of them included massive bank failures across the US financial system. What that means is that up until the Great Depression, when there was a financial panic, people’s savings in banks would vaporize because this is before the FDIC, which means that when things started going sideways, there would be runs on the banks, the banks would go bankrupt, and if you were one of those unlucky people who didn’t get your money out, you lost everything. This is also a period of time in which banks when they got in trouble would call their loans due. So if you had taken out a loan to buy a farm and a plot of land, which was very common at that time, the bank would come to you and say, you must pay the balance today, overtaking the farm. This is where you see things in The Grapes of Wrath, where you have all these families who have been making payments and their businesses are good, but the bank comes and says, I need it all now or I’m taking the farm. That’s why — because there was no backstop at all for the banks. It’s also worth noting that in all eight of these, not only did you have massive bank failures, but the average length of one of these panics — that is, when you have periods of high unemployment, low economic growth, and basically things are just more or less miserable — was about 4.25 years. And that’s important because after the Great Depression, there were only six, and of those six, only two — so one-third of them — included massive banking failures. And notably, the average length of these financial panics was 2.2 years long. So not only did we reduce the number of bank failures after the Great Depression, but we reduced the length of recessions in general. And so it’s really interesting when you look at it and be like, man, something clearly happened during the Great Depression that changed this, and I think you all know where I’m gonna be going with this.

[00:11:33] But it’s also worth noting when you start looking at this prior to 1957, which was the very first financial panic that we’re gonna be talking about after the Great Depression. Okay. So we had a nice good period of years that also included World War II and then, you know, the beginning of the baby boom and the expansion of suburbs and stuff like that — a huge period of economic growth. But prior to that, so this includes the Great Depression all the way back to the founding of the Republic, the cause of every one of these financial panics without exception was banks overspeculating, particularly in the fields of real estate or capital heavy industries, most notably railroads. That is to say, the banks were taking huge swings with depositor money because there were no regulations. And I’ve done an entire series on the history of central banking in the United States — linked to that in the show notes. But you’ll note that there’s a period of time in which we had what was called the era of free banking, where there was literally no regulations, state banks issued their own currencies, there’s all sorts of currencies going all over the place, the exchange rate was not just between, you know, individual states but between individual banks within that state. So it was very much what a lot of libertarians are saying like would be the ideal financial system. But still during that period of time, you had two major financial panics that led to massive bank failures, a stagnation of the economy, for a minimum of five years both times.

[00:13:08] And so it’s worth noting that when we get to 1957 after the Great Depression, this very first financial panic — it’s unique. It’s unique because it wasn’t sparked by overspeculation by the banks. It wasn’t sparked by overspeculation in real estate. It wasn’t sparked by collapse of industries that, you know, because the banks were calling in their loans. It wasn’t sparked because the railroad was bankrupt, thus causing a cascading banking failure. It was unique because it was sparked by basically two things. Number one was a decline in military spending. And if 1957 sounds familiar to you, it should because it’s right smack in the middle of the presidency of Dwight D. Eisenhower, who is famous for his farewell address in which he warned of a growing military industrial complex that would start seizing greater and greater control over the United States economy and extracting more and more money in the form of subsidies and military spending. And 1957 is notable because that was the year that Eisenhower, the former five-star general overall commander of US forces during World War II, cut military spending because he saw this idea of this military industrial complex and wanted to start blunting it. The other thing that contributed to the recession of 1957 was the decline in car sales because after World War II, a lot of the manufacturing base that was making things like battleships and airplanes and tanks switched over to cars. But at the time in the United States, it was possible to go from Portland, Maine to Milwaukee, Wisconsin, using nothing but local light rail. Almost all of the cities — Milwaukee, Wisconsin, where I’m from, is a great example of this — they had a rail system that ran through the entire city. Like when I was doing my undergraduate degree, they were ripping up a major road and they were ripping it up and replacing the sewer system, but what they were ripping up was also rail lines that were embedded in the concrete. And so people were looking around and going, well, the car is nice, but why would I need that when I have all this other stuff?

[00:15:19] And so in response to this recession, the first of its kind that was caused not by banking failures but by a change in the economy, the way that the United States government dealt with that was basically two things. Number one was the passage of the Federal-Aid Highway Act in 1958 that basically started creating all the highways that we have to put up with today, right, and this of course goes to Dwight D. Eisenhower’s highway program where he wanted to be able to have stretches of interstate where you could land a B-52 bomber on them. And so if you ever are driving along and see a sign for that, just note that that was designed to land a plane on. But also car companies accelerated buying and dismantling light rail infrastructure in cities, most notably in places like LA, San Francisco, St. Louis, Cincinnati, Milwaukee, Chicago, and so on. But what didn’t happen was banks didn’t explode. There were exactly zero bank failures in this first of financial crises after the Great Depression.

[00:16:21] And this continued because the very next two were in 1973 and 1979 — both of them sparked by geopolitics, specifically in the case of ’73, the Yom Kippur War where Israel had to fight for its existential existence, which then sparked off the oil embargo to the United States, which of course supported Israel during that war. And in 1979, there was the Iranian Revolution in which the Ayatollah Khomeini came to power and overthrew the US-backed Shah, which then sparked another oil embargo. But in both cases, both of these recessions were sparked by geopolitics, thus hitting the most critical piece of the supply chain, which is the fuel which is created by, you guessed it, oil.

[00:17:06] So now, ladies and gentlemen, this brings us to 1980 with the election of Ronald Reagan. And we’ve had not one, not two, but three financial crises in which there were no banking failures to speak of. Now, were there some here and there? Sure ’cause that’s what’s going to happen no matter what happens. But it wasn’t like we woke up one day and 200 banks had gone over, which was what the pattern was prior to the Great Depression. And over the years of the Great Depression, the actual total number was north of 9,000. So this is a pretty big improvement. But the question that you should be asking yourself is, and I’ve been, you know, again, I’ve been alluding to it this whole time, is: what happened in the Great Depression? Like what changed the game here? And it really boils down to two very distinct things. Number one was the Federal Deposit Insurance Corporation, which guaranteed up to a certain point the deposits of individuals at their local retail banks. This also applied to a lot of businesses as well. And I’ve done an entire episode on that as well that you can go back and listen to. But what that meant was is that people then could have the confidence to not go run on a bank. Because remember prior to the FDIC, if your bank went under and you didn’t get your money out, you no longer had anything. You lost it all. And so there was a lot that you had to trust in that bank, and the banks had demonstrated over and over and over again that they could not be trusted with your money, but they were the only game in town, so what you gonna do? And so the FDIC really blunted people’s will to go run on the banks, which really helped them be able to survive things like the Recession of 1957.

[00:18:46] The second was something called the Glass-Steagall Act. And both of the FDIC and the Glass-Steagall Act were passed in 1933. So what’s the Glass-Steagall Act? The Glass-Steagall Act basically looked at banking and looked at all of the bank failures in the Great Depression and asked two fundamental questions. Number one: what do we want banks for? and number two: why do they keep failing? So the answer to the first question was banks should be boring. They should not be wild speculative machines. They should be boring. They’re critical infrastructure. This should not be exciting. And so the role we want for banks are to take deposits, hold them in trust, and be able to give out loans so that people can invest in themselves in the economy — full stop. We do not want banks involved in very risky transactions and speculation. So then the answer to the second part of that is why do they keep failing? Because they can’t keep their hand out of the cookie jar. In every one of these cases, going back to the founding of the Republic, the financial panics were sparked because banks got into speculative real estate. What is speculative real estate? It’s when you buy a piece of land with the expectation that maybe just maybe it’s gonna shoot up in value. This is very similar to how Bitcoin operates right now, and, you know, maybe it has a different role in the economy in the future, but I’m not talking about the future. I’m talking about right now. So if you were looking at this and you said, Bitcoin’s going up and I’m just gonna YOLO a million dollars into Bitcoin, you did it at $60,000 a coin, and you’re looking at it right now, you just lost a ton of money. And that’s okay because it’s your money to lose. But if you’re a bank, it’s not your money. It was your depositor’s. It was the mom and pop running the general store. It’s that family who just opened up a farm. It’s that guy who’s trying to make his way in the world who gave you their money in deposit that you just gambled away on this speculation. And when you don’t have it and they figure this out, everybody runs on the bank, the bank closes, and then contagion takes over and one bank failure turns into a hundred. And so Glass-Steagall said, no, we’re not doing that anymore. Retail banking and commercial banking, you’re gonna go over here. This is what you’re allowed to do: you take deposits, you give loans. Here’s the list of things you’re allowed to invest in because we don’t want you investing in anything more. You’re supposed to be stable. You’re critical infrastructure. You should be boring. And on this other side, there’s investment banking. And you guys, you guys go have a blast, but if you fail, you’re on your own. The — to retail and commercial banks, they’re insured by the FDIC, but you investment banks you are not so go hog-wild, but just know no one’s coming for you when it all blows up in your face. And so that’s what Glass-Steagall did. It separated these two things: the critical infrastructure from the crazy ass casino. And that worked. That was a really good system because when ’57, ’73, and ’79 hit, well, investment banks had a bad time because their speculative investments blew up in their face. But they weren’t critical infrastructure. And so at the end of the day, the mom-and-pop shops, their deposits were just fine. And so people didn’t run on the bank. And as a result, we had three financial crises with no banks going under.

[00:22:03] It makes a lot of sense, doesn’t it? But of course, I would not be here talking to you today looking out at our news media and seeing bank failures if that was the end of the story because all good things. Ladies and gentlemen, have to come to an end, which brings us to 1986 and the savings and loan crisis. Now, I wanna start off before I talk about this because I know somebody is going to complain about this, and I wanna be very clear. I’m using 1986 because that was the year shit got real in the saving and loan crisis. That’s where it all just like spun right out of control and that’s where a lot of devastation started. But it had been building and it had been building for years at that point. It had started in 1980 with the election of Ronald Reagan, who was famously anti-regulation, and so he issued in an era of deregulation, which really got going with — and I’m probably gonna butcher this the name of this act — it was called the Garn-St. Germain Depository Institutions Act of 1982. Okay. So what does that do? Well, see, we don’t have this today, so it’s kind of hard to understand. But there was actually different types of institutions when it came to bankings. Savings and loans were called thrift institutions. This is what you see in the movie It’s a Wonderful Life. It’s a savings and loan. But they don’t exist anymore because they all vanished during this period of time. And why? Well, because this act allowed savings and loans, which were heavily regulated and were told, this is your lane. You stay in your lane. You’re not allowed to gamble anything outside this lane. Well, when this act came in, the Garn-St. Germain Depository Act, in 1982 — God, that’s a huge mouthful — they said, yeah, you guys can take some risk. Oh, and by the way, we’re going to limit the number of regulators in the system, so not only can you take on more risk, but there’d be less people watching. But hey. Markets regulate themselves because that’s what we’ve learned from the Great Depression all the way back to the founding of the Republic, so have a good time, guys. And away they went. The other thing that was happening though is that if you know your history, you know in 1979 in the oil embargo was one of the contributing factors, not the only one, but one of the contributing factors that sparked off the record inflation that Reagan was elected in no small part because of. And it was at that time that the Federal Reserve was raising interest rates to nosebleed levels in order to combat that inflation. Well, I’ve said before on the show. I’ll say it again. In a period of rising interest rates, fraud will be revealed. And so now interest rates are rising, rising, rising at the same time that these savings loans are being deregulated and told, have at it. And so it really gets going in 1982 with the passage of this act, but it’s in 1986 that the number of bank failures in a year reaches over 200. To be fair, in ’85, it wasn’t really much better. It was 175, give or take a couple banks. But like 200 seems like a good number, so we’re just gonna go with that. But the point here is that from 1986 to 1992, it stayed over 200 banks failing every year for that entire period of time, with 1989 getting the highest score with 534 financial institutions going belly up. This ain’t great, folks. It can all be traced back to this entire idea that, hey, what we’re gonna be doing is like let’s deregulate things and really innovate and make this boring part of our critical infrastructure exciting again because isn’t that gonna be great? And then, so this becomes the first major banking crisis since 1929 in which we did not have a major period of time with major amount of banks failing.

[00:25:53] And so if you’re sitting here looking at this and you go, hold on a second. We’ve had this great stretch of time, one of the greatest economic expansions the world has ever seen with all of these regulations with the Glass-Steagall Act and the FDIC and telling savings and loans institutions that they can’t be really risky, and we have 56 years in which we had a great deal of financial stability and then we deregulated and it didn’t go well. Maybe there’s a lesson to be learned there. Maybe we should have stopped and looked at it and said, maybe the deregulation of the banks maybe the banks have shown they can’t be trusted. And that of course is a lesson we should have learned at that point, isn’t it folks? But of course — of course we didn’t learn anything because one of the things that just blows my mind, particularly when it comes to politics or, you know, just human nature in general, is people go in and be like, well, that didn’t work, but I really wanted to because of course everything is emotional, right? And so when it comes right down to it — but like I really want this to have worked. And so now we get 1992, and then we have a few good years. And then in 1999 is where shit really gets strange because everybody at that point remembered the saving and loans bust and everybody at that point really understood that like, oh, yeah. We deregulated this and it had gone poorly and that was not the only industry in which we had done that for. But yet so many of the people who had lived through the eighties and early nineties were looking at it and going, look. The internet came out of it and internet companies are taking off on the stock market, so we must have done something right. And they’re not entirely wrong, but when it comes to financial system, I would argue that they were off-base. But of course if at first you don’t succeed, double down, call the other side a liar, and do it all again.

[00:27:39] So in 1999, there are two acts that were passed under the Clinton administration by a Republican Congress. This is the Gramm-Leach-Bliley Act, which repealed parts of Glass-Steagall Act. Now, remember Glass-Steagall Act is this act that says, No, banks. You retail and commercial banks, you’re over here. You’re supposed to be boring, critical infrastructure. Investment banks, you guys can gamble to your heart’s contempt but no one’s coming to save you. So this act, the Gramm-Leach-Bliley Act started to repeal Glass-Steagall and saying, let’s give it a shot again. It went really well from the Great Depression all the way back to the start of the Republic. Let’s try it again. Maybe we’ve learned our lesson because we’re looking back at 1986 and it appears the banks can be trusted again, right? The other thing that this act did was allowed banks to consolidate into financial holding companies, and this is a fancy form of a merger. But basically, what you could do is create this financial holding company that would then buy some investment banks and some retail banks and some commercial banks and then just hold them all under one big umbrella, which is kind of interesting because on the one hand you’d be like, oh, see? Like yes, we repealed Glass-Steagall but we’re totally separate institutions here, right? But they all consolidated up to a parent company, so if the investment bank blows up under that umbrella, the other two branches of commercial banking and retail banking they’re gonna blow up, too. So they’re essentially rigging themselves to explode.

[00:28:57] And the second act that was in 1999 passed under the Clinton administration by a Republican Congress was the Financial Services Modernization Act, which basically went well, we got rid of half of Glass-Steagall. Let’s get rid of the other half. So now, Glass-Steagall at this point is completely dead. Banks are now free to merge to their hearts content. They can now take your deposits from a retail bank and they can now use them in investment banks for hyperspeculative assets. They also allowed — and this was this is blows my mind looking back on it — but they also allowed banks to consolidate and purchase insurance companies and securities companies. So now, you have your securities institutions where like you might have an investment fund that’s owned by a bank who then also owns an insurance company that is insuring that bank and insuring those securities that the bank is using your money as a depositor to create and market to the same depositors. So you can kind of see how this is all becoming interconnected because there’s just no chance at all that the banks would consolidate themselves into these just Leviathan-like organizations that were all interconnected and could possibly all explode at the same time with one thing happening in the market, right, because that’s just not what banks would do under that circumstances. And if in 1999 you believe that, I have oceanfront property in Arizona to sell you.

[00:30:22] So it’s worth noting that right after the passage of these acts, it was 2000, where you had the dot-com bust. Essentially, again, what we saw here now was for the first time since the Great Depression, a number of institutions started to go under because of overspeculations, but it wasn’t all that terrible. Not a lot of banks went under because they didn’t have time between the passage of the acts in 1999 and dot-com bust in 2000 to consolidate to a point. But a lot of investment banks lost their shirt in this and that should have been a warning. But of course, when there’s money on the line, Cassandra is not welcome in your home, which brings us to 2008.

[00:31:00] So in the lead-up to 2008, it’s worth noting that what happened for the banks in this particular case was now, what the banks had had access to that they had not had had access to for almost 70 years was the ability to consolidate all these different types of financial transactions under one roof, and they were able then to create massive amounts of leverage. And if you know anything about leverage, leverage is how you make tons of money. But the inverse is true as well. If you’re overleveraged and you lose, you lose tons of money. And I remember this period of time because I had just graduated and got my undergraduate degree. And in 2006, I was I entered it into the mortgage industry and started selling mortgages because of course everybody was selling mortgages at that point. It was a way to make a quick buck. And I was young and I liked money, so that’s what I did. But I thought it was weird that these storied investment banks like Goldman Sachs were offering checking accounts. I remember the day where I looked at it and I was like, I don’t think that’s how that’s supposed to go, when Goldman Sachs started offering interest-bearing checking accounts with a debit card where you could just have your paycheck just direct deposited with this investment bank. Why were they able to do that? Because Glass-Steagall wasn’t there anymore. So Goldman Sachs, an investment bank that’s supposed to take on tons of risk, was now telling you, just give me your deposits. It’ll be fine.

[00:32:17] And then at the same time — and I’m gonna use Goldman Sachs as an example but there were plenty of other institutions that did this — Goldman Sachs was one of the many investment banks along with, you know, Washington Mutual, Merrill Lynch, and the list goes on that were starting to create new investment vehicles, new types of derivatives, one of them called a CDO or Collateralized Debt Obligation in which they were packaging mortgages together. And if you’ve watched the movie The Big Short or read the book and followed along, basically what was happening is they were giving out tons of mortgages. They were packaging them as CDOs, the collateralized debt obligations, they were then selling those on the market, and they were making just a wonderful spread. They were making a ton of money doing this because they were considered really, really safe. The problem is is that as they sold more and more of these, more and more people wanted to buy them, but there’s only so far you can go with the current population of mortgages. So what was their solution? Because remember a lot of regulations have gone away at this point. A lot of investment banks have now merged with retail banks. We’re seeing all of this capital and leverage and it seems to be going very well. So what they did is they changed mortgage standards. If you’ve ever heard of a liar loan where they just come in and they state their income and they state their assets and no one ever goes and checks, it was a very common way to get a mortgage in 2006 when I was doing it. Well, the reason it existed was because they needed mortgages to be coming in the door so they could package them into CDOs and sell them and make money. But then on top of it, what people were starting to do was to take out insurance on the CDO just in case it would fail. Well, who owns that insurance company? That’s right — the banks because they’re now allowed to own the insurance company that’s insuring the securities that were created by the securities company that lent out the money to create them from the retail bank under that financial holding company, and all of that is going to lose huge if that CDO fails. So when they sell that off in the market, then they what they were doing — Goldman Sachs actually got fined for this — is they would go over to another bank and say, Hey, I wanna take out insurance on that one, knowing that they had rigged it to explode. And so what ends up happening then, ladies and gentlemen, is when that CDO fails because people cannot make their liar loan payments, your deposits that were in the retail bank have now vaporized because that’s what they had lent out, so that person could buy the home. And on top of it, now, your bank is on the hook for the insurance contracts they’ve given to other people on those same securities. And the securities company that is also owned by that bank is now on the hook for all of the damages and losses on the speculative investments it made for the same security.

[00:34:51] That’s what happened in 2008. The financial sector was having a gigantic party and money was flowing like the Nile. But what we had done by removing Glass-Steagall is we had allowed a nuclear-powered casino to be bolted on top of critical infrastructure, and at the time, everybody had this unspoken understanding that should the bets fail, the banks would be able to hold the population hostage to make the government backstop their bad bets, so that they themselves as banks wouldn’t fail. In 2008, if you lived through it and you understand it, proved them right. My question, ladies and gentlemen, is after 2008, how do we not fully comprehend with all the weight of history that banks cannot be left to their own devices? It’s too tempting because they can make tons of money, and when they take the first step, they’re going to make money, and then they’re gonna want more and more and more and that’s just human nature.

[00:35:55] In the aftermath of 2008, there was an act, the first major financial regulation piece of legislation in years, called the Dodd-Frank Act. It did three things. It created the Consumer Financial Protection Bureau, the CFPB, which its sole job was to be this independent organization to go out and look at these banks and go, are you actually being fair to your customers? And it should be noted that this is a horribly controversial organization, but it’s also noted that the same people who really hate this are the same ones that still believe that if we just deregulate banks entirely, then they can just totally be trusted. It’ll be fine. And they are the same ones who will say, well, the reason that we had 2008 was not because of deregulation, it was because of overregulation, which doesn’t make any sense given the history. They also have no plan as to how they’re actually going to protect depositors. But I digress.

[00:36:52] Number two: the Dodd-Frank Act instituted what’s called the Volcker Rule, which limited proprietary trading, hedge fund activities, and private equity activities for banks. And for large banks, they were stress tested if they were deemed to be systemically important financial institutions. It should be noted that institutions like SVB lobbied to not be included on that list and claimed themselves as a regional bank. They lobbied for even looser regulations, even after they got that exception because the bank and certain political parties have fought this act from the moment it was brought up. Their argument is that it’s bad for consumers and it’s bad for innovation. But looking at 2008, I have to really question was that really good for consumers and innovation, and how much financial innovation do we really need when it comes right down to the retail side of the banking equation? Shouldn’t the innovation be separated out into an institution where they can innovate and make tons of money and if they fail, it’s not gonna take us all down with it? It hasn’t really hurt the bottom line as much, but it has made the years since the passage of the Dodd-Frank Act not nearly as awesome as the 2000s were. And if you lived through the 2000s and you remember what that stream of money looked like, it was amazing and beautiful. And you always wanna get back to that, but at what cost?

[00:38:13] Which brings us to the present, ladies and gentlemen. Right now, we’re looking at three US bank failures — that of course is Silvergate, Silicon Valley Bank, Signature — one international bank. That’s Credit Suisse. And other ones are wavering, like Deutsche Bank and HSBC. People are looking for other options to be able to be out of this system because they’ve come to a conclusion, the right conclusion in my mind, that banks are not to be trusted, and it’s too easy for banks to take over their regulators to regulatory capture, so they’re looking for other options. They’ve turned their eyes towards Bitcoin and the creator of Bitcoin clearly was on that same side of the equation. But the crypto industry has yet to fulfill its promises. But my question for you ladies and gentlemen is have we learned our lesson yet? Have we learned that the banks will not behave unless they’re watched thoroughly? Have we learned that when we’re playing our game with our personal finances, we need to understand the board because like it or not, for the time being, this is one of the only games in town.

[00:39:19] That’s my show today, ladies and gentlemen. I know it’s gone long, but I do have one big request for you. My Instagram following is getting really close to another milestone. I’d love to do another AMA, so if we can get the Instagram following up to 300, I’d really appreciate that. If you are following my Instagram, thank you so much from the bottom of my heart. You’ll have noticed I’ve started putting out a lot more content, and it would mean the world to me if you would share it. Share it in your stories, send it to a friend, help somebody else out by sharing the message that we have here on this show. I would really appreciate it from my bottom of my heart. And until next time, I’ll see you on Tuesday, ladies and gentlemen. Have yourselves an awesome weekend.

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